A comprehensive environmental insurance strategy is one of the best options for protecting against the catastrophic environmental- and pollution-related problems that can occur on any site development.
The potential for environmental exposures is ever-present when it comes to developmental projects.
In fact, a review of the RT Specialty's Environmental and Construction Professional Practice (RT ECP) book of business from 2020 to 2021 found an uptick in soil and groundwater contamination exposures faced by the company's real estate acquisition and development insureds in commercial and habitational real estate; manufacturing; healthcare and institutional sectors.
Here are two examples from hundreds of pollution-related news stories that occurred over the past few months:
- The redevelopment of the Vallco Shopping Center in Cupertino, California, into 2,400 homes, 400,000 square feet of retail and 1.8 million square feet of office space was recently halted when a variety of chemicals and metals, including petroleum hydrocarbons, polychlorinated biphenyls (PCBs), tetrachloroethene, pesticides and metals, were discovered on the 50-acre site. As a result, the project's owners will have to “submit plans to address the contamination that presents an unreasonable risk to human health or the environment given the intended future use of the property."
- The former site of the Lakewood Hospital in Cleveland, Ohio, stalled when tetrachloroethylene was discovered under the concrete slabs of the redevelopment project that includes 200 housing units, retail, and office space. The cleanup is estimated at about $1.7 million.
As a result of instances like these, the overall demand for environmental insurance, specifically contractors pollution liability (CPL) and pollution legal liability (PLL) coverage for development projects has increased dramatically. Further, in our opinion, the industry's greater understanding of the liability associated with pollution-related claims and the desire to protect assets in the face of catastrophic situations has also heightened demand.
CPL Policy Forms
CPL is designed to help cover pollution conditions resulting from contracting operations performed by or on behalf of the named insured. This may include third-party bodily injury and property damage claims, as well as cleanup and defense costs.
Furthermore, CPL programs are commonly written to help protect against the exposures related to microbial matter, legionella, silt and sedimentation, silica, petroleum hydrocarbons, low-level radioactive waste, illicit abandonment, methamphetamines, medical/infectious/pathological wastes, and electromagnetic fields.
Additional enhancements are available to help cover punitive damages, where allowable by law, emergency remediation, crisis management, litigation, and subpoena expenses, as well as exposures surrounding the use of green building, and sustainable and energy-efficient materials.
Project CPL Purchases on the Rise
Over the past decade, RT ECP has seen sharp increase in the purchase of CPL policies by prime or general contractors, as well as trade contractors required by contract to evidence their own practice or standalone project coverages. Additionally, we have seen developers and property owners not wanting to rely on the contractor's corporate CPL programs or deal with the pushback from contractors who have purchased their own project policies via CPL Owner Controlled Insurance Programs (OCIP).
These policy forms have been designed specifically to help protect the owner from third-party claims, as well as extend environmental coverage to the prime contractor and all subcontractors. OCIP policies can be beneficial in helping shield the owners and developers' exposures to contractors' negligence while working on the project.
Don't Forget PLL Coverage
All of the sites in the pollution-related news stories were impaired by either known or unknown pre-existing pollution conditions. Nonetheless, issues still surround the understanding of environmental exposures like these because the clean-up or third-party liability associated with unknown pre-existing pollution conditions is not often covered by traditional policy forms.
Sure, a CPL policy will likely respond if a contractor punctures an unknown underground storage tank (UST) during excavation activities. But the remediation of a leaking underground storage tank and the surrounding contamination discovered during site development activities would likely not be covered under the CPL's terms and conditions.
As a result, PLL coverages are commonly purchased to help offset on- and off-site cleanup, remediation and defense expenses, third-party bodily injury claims and property damage, as well as coverage for first- and third-party transportation and non-owned disposal sites (NODS). Coverage may also be available to help protect against the construction delay costs associated with project stoppages or pauses caused by the discovery of unknown pollution conditions.
In addition, the policy can also be structured to cover known pollution conditions; regulatory re-openers of existing pollution conditions; or as a backstop for environmental indemnity provisions provided by the seller.
New Environmental Insurance Options
With a new focus on infrastructure driven by President Joe Biden's $1.2 trillion infrastructure plan, many stakeholders have also begun to fortify their best interests with sophisticated risk management strategies written to help protect projects from the catastrophic environmental risks associated with the design, building and repair of hard infrastructure projects like roads, bridges, airports, rail lines and ports.
One specific example is an infrastructure pollution policy (IPP). This policy form was developed to help cover the cleanup, damages and claims expenses of developers, owners, general and prime contractors and additional insureds like subcontractors and governmental entities.
In the past, the traditional risk management approach to these types of projects typically involved writing two or more pollution liability policies or balancing the limits between separate policies and possibly with different carriers, creating a cumbersome approach to risk management. The IPP seeks to eliminate these complexities by combining insuring agreements into one policy form that is designed to help cover all the involved stakeholders.
Comprehensive Coverage Options
A comprehensive environmental insurance strategy is one of the best options for protecting against the catastrophic environmental- and pollution-related problems that can occur on virtually any site development. The key is looking ahead and understanding the potential liabilities and associated pitfalls before the planning even begins.
John J. Heft is an executive vice president in RT Specialty's Environmental and Construction Professional Practice (RT ECP).